How do you invest in a personal business with a 401k?

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Investors can use their 401(k) funds to finance a personal business if the business is set up as a C corporation with its own 401(k) plan, according to Inc. It is necessary to roll other 401(k) assets into the C corporation's plan before investing, and the personal business must be defined as a valid investment for the new 401(k) plan as well. Once invested, the 401(k) funds are considered business funds and are available for any qualifying business expenses.

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One major reason for establishing a C corporation to use 401(k) funds as capital for a personal business is to avoid the significant tax penalties associated with early 401(k) withdrawals, according to Inc. The other primary reason for using the C corporation framework is that the S corporation and other corporate structures do not have the correct framework to support a 401(k) used for investment in the same business. Using a 401(k) as a financing mechanism can also help insulate a business owner from some of the risks of funding a business via small business loans. This is due both to 401(k) funds providing pre-tax dollars for the investment and the lack of credit implications if the money cannot be paid back. The downside to funding a personal business using 401(k) funds is that doing so usually eliminates a significant amount of a person's retirement savings if the business does fail.